August 20, 2002
The rule is simple. Brokers are not allowed to split profits or losses with customers. So what did Credit Suisse First Boston (CSFB) do when it came time to allocate Initial Public Offering (IPO) shares? It devised ways to share the wealth. If customers were going to realize huge profits, CSFB wanted a piece of the action.
And customers were so hungry for a piece of those “hot” IPOs that they gladly went along. They agreed to pay excessive commissions – sometimes as high as one third of their IPO profits – on secondary trades unrelated to the IPO. They knew that if they refused, CSFB would cut them out of the IPO loop and kick them off of the gravy train.
After all, two thirds of the profit is better than nothing.
The scheme eventually caught up with CSFB in January 2002, when the Securities and Exchange Commission and National Association of Securities Dealers imposed a joint $100 million fine. Then again, it was only money, and CSFB has a good deal of that.
Earlier this month, some CSFB personnel settled some related NASD claims. Two CSFB executives were fined and suspended for their part in the plan to charge customers excessive commissions in connection with “hot” Initial Pubic Offerings (IPOs).
The two men, J. Anthony Ehinger, CSFB’s Global Head of Equity Sales, and George W. Coleman, the firm's Institutional Listed Sales Trading Head, each agreed to pay a $200,000 fine, and accept a 60 day suspension. They agreed to the sanctions without admitting or denying any wrongdoing.
In a related matter, the NASD suspended four former CSFB employees for one year and fined them $30,000 each for failing to provide NASD with timely testimony in this matter. All four individuals were members of the firm’s PCS Technology Group, headquartered in San Francisco.
The NASD says that Ehinger and Coleman developed a tracking system, called the “New Issue Performance Report (NIPR),” to track commission payments and calculate the profits that customers would have realized if they sold IPO shares on certain dates. That way the firm could determine whether profits seemed “too high” in relationship to customary commissions. If they were, customers were “encouraged” to pay higher commissions.
The NASD stated that Ehinger and Coleman both discussed the ratio of profits to commissions with CSFB's Syndicate Desk as part of an effort to increase commission revenue and influence IPO allocations. Although they also communicated with the firm’s legal and compliance departments about the propriety of “high commissions,” the NASD concluded that CSFB’s “Legal and Compliance was not informed of the magnitude and scope of excessive commission rates being paid to the firm, or the existence of the NIPR.”
Attorneys for the two men issued a joint statement stating that the action “raised enormously complicated and novel legal questions.” The statement said that the settlement was “the best interests of all concerned.”
Who were the “all concerned,” other than Ehinger and Coleman? Should the public be satisfied to learn that CSFB’s legal and compliance officers didn’t have all of the information – or should we be wondering why they didn’t.
The fines have been substantial. Then again, CSFB did collect those improper commissions. At the end of the day, who paid more – CSFB or its customers? We may never know.
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